Overview of Stablecoin Regulation
Stablecoins can function as efficient and inclusive means of payment. It is generally understood that utilization of stablecoins require strict regulations because if they fail to maintain value or become non-redeemable, they may trigger a bank run, and the fire sale of reserve assets may pose serious risks to the broader financial system.
As stablecoins are payment instruments issued by private entities such as financial institutions, mechanisms to ensure their credibility are essential. In particular, regulatory requirements must be established for issuer supervision, reserve asset management, and user asset protection procedures in the event of insolvency.
Global Trends in Stablecoin Regulation
In the United States, the legislative process for the Stablecoin Bill (GENIUS Act) is underway pursuant to an executive order issued by President Trump. The bill allows both banks and non-bank entities to issue USD-denominated stablecoins within the United States, imposes obligations on issuers such as external audits of reserve assets, and includes reciprocity provisions applicable to foreign-issued stablecoins.
The European Union, under the Markets in Crypto-Assets Regulation (MiCA), which came into effect on 30 December 2024, permits both asset-referenced tokens (ARTs), which maintain value based on a basket of assets, and e-money tokens (EMTs), which are referenced to a single fiat currency. For EMTs, MiCA operates in conjunction with the existing Electronic Money Directive (EMD) to maintain regulatory consistency. MiCA also imposes enhanced requirements on "significant tokens" whose transaction volumes or user bases exceed certain thresholds.
In the United Kingdom, the Bank of England and the Financial Conduct Authority (FCA) are jointly developing a regulatory framework for stablecoins. The forthcoming regime will adopt a dual regulatory model under which stablecoin issuers are subject to the Bank of England's oversight as a financial market infrastructure (FMI), as well as to the FCA's rules on consumer protection and market integrity, with the aim of ensuring financial stability.
In Singapore, amendments to the Payment Services Act are underway to bring within scope stablecoins that are referenced to the Singapore dollar (SGD) or G10 currencies. Stablecoins issued in Singapore in compliance with the new framework will be disclosed as "MAS-regulated" stablecoins. In contrast, foreign-issued stablecoins will remain subject only to the existing digital payment token (DPT) regime under the current Payment Services Act, suggesting a bifurcated regulatory approach.
In Hong Kong, legislation for stablecoin regulation is under development. The proposed bill includes within its scope the issuance of HKMA-designated stablecoins in Hong Kong, as well as the issuance of HKD-referenced stablecoins outside Hong Kong. The bill establishes a strict pre-approval regime by the HKMA over the governance and operations of licensed stablecoin issuers.
Proposal for Domestic Stablecoin Legislation
Stablecoins possess characteristics of both payment instruments and investment assets, and there is currently no existing legal framework that adequately captures both aspects. It is therefore necessary to establish a dedicated regulatory framework tailored to the nature of stablecoins.
Issuance should be permitted not only for stablecoins pegged to the Korean won (KRW), but also for those pegged to other fiat currencies. However, for KRW-pegged stablecoins issued overseas, domestic regulation should be proactively enforced on an extraterritorial basis. For stablecoins issued overseas and referenced to foreign currencies, distribution through domestic exchanges or platforms should be permitted only where compliance with regulatory standards equivalent to Korea's domestic issuance requirements has been confirmed.
Issuance of stablecoins by both banks and non-bank entities should be permitted. However, issuers must obtain a licence and comply with requirements such as minimum capital thresholds, disclosure obligations, and IT security standards. Reserve assets must be restricted to highly liquid assets and placed in custody with an independent third-party institution.
The regulatory framework should also grant financial authorities the power to intervene in emergency situations such as issuer operational failure or insolvency. Additionally, as stablecoin transactions can bypass regulatory monitoring via self-hosted wallets, foreign exchange controls related to stablecoins should be reviewed separately from a broader macroprudential perspective.
As the virtual asset market continues to grow rapidly, the importance of stablecoins—designed to minimize price volatility—is increasingly recognized. Stablecoins are pegged to fiat currencies or specific assets, offering relative price stability compared to other cryptoassets. This makes them highly suitable for use not only in payments and remittances, but also across a wide range of digital economic activities. In particular, the recent policy shift by the Trump administration in the United States—signaling formal support for stablecoins over central bank digital currencies (CBDCs), and declaring that cryptoassets such as Bitcoin will be treated as strategic reserves—marks a significant turning point. These developments are expected to accelerate the adoption and use of stablecoins within the global digital asset ecosystem.
In light of these international trends, there is a pressing need for a serious policy discussion on the regulatory framework for stablecoins in Korea. This report seeks to contribute to that discussion by analyzing legislative and regulatory approaches in major jurisdictions and proposing a framework tailored to the Korean context.
Stablecoins are digital assets designed to maintain price stability by pegging their value to that of a fiat currency or other specific assets. There are three main types of stablecoins. First, fiat-backed stablecoins are collateralized by fiat currencies such as cash, bank deposits, or government bonds. Second, asset-backed stablecoins are backed by tangible or digital assets such as gold or cryptocurrencies like Bitcoin. Third, algorithmic stablecoins attempt to maintain their peg through algorithmically controlled supply adjustments and arbitrage incentives. However, as evidenced by the Terra-Luna collapse, algorithmic models are highly vulnerable to loss of market confidence. Once trust is broken, price stability of the stablecoin can deteriorate rapidly. For this reason, an increasing number of jurisdictions no longer recognize algorithmic models as legitimate methods of stablecoins issuance.
Stablecoins function as the reserve currency within the virtual asset ecosystem and are primarily used to facilitate trading, lending, and borrowing of other digital assets, particularly in global markets such as the United States. At present, stablecoins are predominantly utilized on virtual asset trading platforms and decentralized finance (DeFi) protocols. However, they could potentially be adopted more broadly by households and businesses as a means of payment in the future. In fact, in regions experiencing fiat currency instability—such as parts of Africa, Latin America, and Southeast Asia—stablecoins are already widely used in the real economy.
According to the Report on Stablecoins published in November 2021 by the President's Working Group on Financial Markets (PWG), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC), stablecoins, if well-designed and appropriately regulated, could offer a faster, more efficient, and more inclusive payment option relative to existing payment systems. At the same time, however, stablecoins pose significant financial risks. Notable risks are harms against market integrity and investor protection, particularly in the context of speculative virtual asset trading that may involve asymmetric access to information. Additionally, stablecoins carry illicit finance risks, including the potential misuse for money laundering and terrorist financing, especially when anonymity features are exploited.
The most significant risk associated with stablecoins arises from the prudential concerns that may materialize if stablecoins are widely adopted as a means of payment. In particular, if a stablecoin issuer fails to maintain a stable value or honor redemption requests, user confidence could deteriorate rapidly, potentially triggering a bank run on the stablecoin—a vicious cycle of large-scale redemptions. Such a scenario could lead to fire sales of reserve assets, resulting in sharp declines in asset prices. Given that reserve assets often consist of financial instruments, this could have serious adverse effects on the broader financial system. Moreover, if stablecoins become widely used in payments, disruptions to the payment chain could have immediate negative effects on the real economy. The dominance of a particular stablecoin in the market may also result in a concentration of economic power, potentially creating anti-competitive effects and raising concerns over market monopolization.
Currently, the mechanisms for the issuance and redemption of stablecoins vary significantly across projects. There is also wide variation in the composition and transparency of reserve assets. Some stablecoin arrangements reportedly hold nearly all reserves in safe instruments such as deposits at insured depository institutions or U.S. Treasury securities. Others include riskier reserve assets, such as commercial paper and corporate bonds. Redemption rights also differ: while some stablecoins purport to offer unlimited one-to-one redemption for all holders, others impose high minimum redemption thresholds or limit redemption to select participants. Some arrangements even allow the issuer to delay or suspend redemptions altogether, creating considerable uncertainty regarding users' ability to convert stablecoins to fiat currency on demand.
In short, because stablecoins are issued not by sovereign entities but by private sector actors such as financial institutions, mechanisms to ensure trust and reliability are essential. This includes clear regulatory standards for issuer qualifications, reserve asset composition and management, and user protections in the event of issuer insolvency. Stablecoins have the potential to transmit risk into the broader financial markets and undermine the unitary nature of currency, thereby threatening the integrity of the payment system. These risks are further amplified in the virtual asset market, which—unlike traditional financial markets—lacks stabilization mechanisms, and where smart contract-enabled immediate liquidations and multi-layered leverage introduce heightened risks of cascading liquidations. These factors underscore the need for a robust and comprehensive regulatory framework.
According to the Bank of England's discussion paper on stablecoins, the stablecoin ecosystem consists not only of issuers, but also of payment system operators, wallet service providers, and other related third-party service providers.
Payment system operators are responsible for developing, operating, or managing blockchain-based payment networks. To ensure financial stability, they must maintain a level of reliability equivalent to that of traditional banks. Entities such as Circle, Tether, Visa, Mastercard, and PayPal fall into this category. In some cases, the stablecoin issuer also serves as the payment system operator, while card networks or fintech firms may also operate such systems independently. Wallet service providers are tasked with storing and transferring stablecoins on behalf of end users. They must implement robust security frameworks to prevent unauthorized access and protect against asset leakage. Cloud infrastructure providers and node operators are considered critical third parties, as they are essential to the continuous and reliable operation of the payment network.
While stablecoin issuers are expected to be directly subject to the forthcoming stablecoin regulatory framework, payment system operators and wallet service providers, as providers of services involving the use of stablecoins, may be regulated as a subset of virtual asset service providers (VASPs) under second phase of legislations within the forthcoming stablecoin regulatory framework. Meanwhile, other related service providers may not require a VASP license, provided that appropriate security and operational risk management obligations are imposed under separate regulatory regimes.
As stablecoins have become an increasingly critical component of the digital asset ecosystem and demonstrate growing interlinkages with the traditional financial system, the United States Congress introduced the Guiding and Establishing National Innovation for U.S. Stablecoins Act of 2025 (the GENIUS Act) on February 5, 2025. The purpose of this legislation is to establish a comprehensive regulatory framework for the issuance and operation of payment stablecoins, with the aims of ensuring financial stability, enhancing user protection, and increasing market confidence through regulatory clarity.
The GENIUS Act, as initially introduced, was subsequently amended to incorporate reciprocity provisions applicable to foreign-issued stablecoins. These amendments were adopted by the Senate Committee on Banking, Housing, and Urban Affairs on March 14, 2025, by a vote of 18 to 6. Specifically, the revised bill mandates that the United States enter into bilateral agreements—within two years of enactment—with jurisdictions that maintain comparable regulatory frameworks for stablecoins. These agreements are intended to harmonize reserve requirements, supervisory protocols, anti-money laundering and countering the financing of terrorism (AML/CFT) standards, sanctions compliance, liquidity requirements, and risk management standards. These recent activities are viewed as a measure to implement U.S. dollar-pegged stables coins in international transactions and promote interoperability.
The GENIUS Act emphasizes the establishment of a coherent regulatory structure through coordination between federal and state authorities. Under the GENIUS Act, primary regulatory authority is conferred upon the Board of Governors of the Federal Reserve System (the "Board"), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC), with state financial regulatory agencies also playing a supervisory role in coordination with federal agencies.
Pursuant to the GENIUS Act, it is unlawful for any person to issue a payment stablecoin for use in the United States unless such person qualifies as a permitted payment stablecoin issuer. Issuers must receive prior approval from the appropriate federal payment stablecoin regulator. Approved issuers are required to maintain reserves on a one-to-one basis against all outstanding payment stablecoins, ensuring that the par value of each stablecoin is fully backed by reserve assets. Qualifying reserve assets include United States legal tender, demand deposits at insured depository institutions, U.S. Treasury bills with maturities of 93 days or less, repurchase agreements with maturities of seven days or less backed by short-term U.S. Treasuries, and central bank reserve balances. These reserves must be maintained solely for the purpose of redeeming outstanding stablecoins and may not be rehypothecated, pledged, or reused for any other purpose.
To promote transparency and accountability, the GENIUS Act imposes robust auditing and reporting obligations on permitted payment stablecoin issuers. Issuers are required to publicly disclose, on a monthly basis, the total amount of outstanding stablecoins and the composition of their reserve assets. In addition, the issuer's financial statements must be reviewed by a registered public accounting firm, while the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) of the issuer must certify the accuracy of the reports. Knowingly submitting false certification is subject to criminal penalties under federal law.
User protection is a central component of the GENIUS Act. Holders of payment stablecoins must have the legal right to redeem their holdings for fiat currency at par value, and issuers are obligated to honor such redemptions promptly. To ensure the safeguarding of customer assets, issuers are required to segregate user funds from the issuer's proprietary assets, thereby preventing co-mingling of asset pools. In the event of the issuer's insolvency, stablecoin holders are granted priority over other creditors with respect to claims on the issuer's assets.
The GENIUS Act also addresses the technological aspect of stablecoin regulation by requiring the principal federal payment stablecoin regulators to collaborate with the National Institute of Standards and Technology (NIST) and other relevant standard organizations to develop interoperability standards and establish technical specifications for payment stablecoins.
In addition, the GENIUS Act seeks to clarify the legal status of stablecoins by explicitly providing that payment stablecoins issued by permitted issuers shall not be classified as securities under federal securities laws or as commodities under federal commodities laws. To promote transparency and regulatory adaptability, the GENIUS Act mandates that the federal government submit an initial report on the status of rulemaking within six months following enactment. Thereafter, the Board of Governors of the Federal Reserve System and the Office of the Comptroller of the Currency are required to submit annual reports to Congress assessing developments in the payment stablecoin market. These reporting obligations are intended to facilitate responsive regulatory adjustments in light of market development and to ensure a sustained oversight of the stablecoin sector.
The European Union (EU) has established a harmonized regulatory framework for crypto-asset markets through the Markets in Crypto-Assets Regulation (MiCA, Regulation (EU) 2023/1114). MiCA was adopted to comprehensively regulate crypto-assets that fall outside the scope of existing financial services legislation. In particular, MiCA imposes strict regulatory requirements on ARTs and EMTs, which are considered to play a significant role in safeguarding financial stability and ensuring user protection.
The MiCA sets out detailed requirements that must be met by issuers of ARTs and EMTs in order to operate within the EU, including authorization, own funds requirements, composition and management of reserve assets, and mandatory publication of a white paper. In the case of EMTs, MiCA explicitly integrates the existing Electronic Money Directive into its framework, thereby aligning EMT regulation with the EU's established regime for payment services. Furthermore, where certain thresholds in terms of transaction volume or number of users are exceeded, the token may be designated as a Significant Token, subject to enhanced regulatory oversight and additional obligations.
3.2.1 Asset-Referenced Tokens
(1) Concept
An ART is a type of crypto-asset that purports to maintain a stable value by referencing one or more assets, which may include fiat currencies, commodities, crypto-assets, or a combination thereof. Unlike EMTs, which are linked to a single fiat currency on a one-to-one basis, ARTs derive their value from a basket of underlying assets or financial instruments. For instance, a stablecoin pegged to a combination of USD and EUR, or a crypto-asset backed by gold, would fall within the scope of an ART as defined under MiCA.
(2) Licensing Requirements for ART Issuers
Any entity intending to issue ARTs must be established as a legal person within the European Union and must obtain prior authorisation from the competent authority of its home Member State. The issuance of ARTs without such authorisation is prohibited, except in limited cases explicitly set out in MiCA. For example, authorisation is not required where the average outstanding amount of the ARTs issued over a 12-month period does not exceed EUR 5,000,000, or where the ARTs are exclusively offered to qualified investors and are not made available to retail holders.
To obtain authorisation, the issuer must submit a comprehensive application including, among other elements, its registered address, details of the management body, business plan, risk management policies, and a description of the reserve asset arrangements. The competent authority is required to assess the completeness and compliance of the application and must issue a decision—either granting or refusing authorisation—within three months of receiving a complete application. The authority may request additional information from the applicant as necessary during the assessment process.
(3) Exemptions for Credit Institutions (Banks)
Where a credit institution—such as a bank—intends to issue an ART, it is not required to undergo the standard authorisation procedure applicable to other issuers under MiCA. However, the credit institution must notify the competent authority of its home Member State at least 90 working days prior to the planned issuance of the ART.
Given that ARTs issued by credit institutions are closely connected to the existing financial system, coordination with the European Central Bank (ECB) is required. The competent authority must cooperate with the ECB to assess the potential impact of the ART on monetary policy transmission, the smooth operation of payment systems, and monetary sovereignty. Where appropriate, the competent authority may issue a negative opinion, thereby restricting the issuance of the ART. This mechanism is designed to preemptively mitigate any systemic risks that a large-scale or widely adopted ART could pose to financial stability.
(4) White Paper Requirements for ART Issuers
All issuers of ARTs are required to prepare and publish a crypto-asset white paper that provides detailed and comprehensible information enabling investors and users to clearly understand the characteristics and structure of the ART. Specifically, the white paper must include information on the identity and legal address of the issuer, the economic model and purpose of issuance, the arrangements for holding and managing the reserve assets, measures for user protection, and disclosures of risks, including market, credit, and liquidity risks. The white paper must be submitted for prior approval by the competent authority before any public offering or admission to trading takes place.
The competent authority is required to assess the white paper and issue a decision—either approving or rejecting it—within three months of submission. Once approved, the white paper must be made publicly accessible to all investors and users, either via the issuer’s website or through an official platform designated by the competent authority.
(5) Reserve Asset and Liquidity Management
Issuers of ARTs are required to maintain reserve assets in order to preserve the stable value of the token and ensure the fulfilment of redemption obligations. These reserve assets must be legally segregated from the issuer’s own operational funds and held in a dedicated separate account. The composition of the reserve must only consist of high-quality liquid assets, such as cash, government bonds, or bank deposits, which allow for prompt and reliable redemption. The reserve must be managed in such a way that ART holders are able to redeem their tokens immediately on demand. The issuer is prohibited from delaying or refusing redemption under any circumstances. These requirements play a critical role in maintaining investor and user confidence in the asset's integrity to ensure that ARTs function as stable and credible means of payment.
(6) Additional Requirements for Significant ARTs
An ART may be classified as a Significant ART if it meets certain thresholds defined under MiCA, in recognition of the heightened risks posed by large-scale adoption to financial stability and user protection. MiCA introduces an enhanced supervisory regime for such tokens in order to mitigate their potential systemic impact. A token is designated as a Significant ART if it meets any of the following criteria:
(i) the average outstanding amount of the ART exceeds EUR 1,000,000,000,
(ii) the number of users exceeds 10 million, or
(iii) the average daily number and value of transactions exceed EUR 50,000,000.
Once designated as a Significant ART, the token becomes subject to stricter regulatory obligations and is placed under the direct supervision of the European Banking Authority (EBA). The issuer must implement enhanced risk management frameworks, regularly report on its financial condition and operational status, and may be required to comply with additional liquidity requirements as determined by the EBA.
3.2.2 E-Money Tokens
(1) Concept
An E-Money Token (EMT) is a type of crypto-asset that maintains a stable value by referencing a single official currency on a one-to-one basis, and functions in a manner similar to traditional electronic money (e-money) but issued on a blockchain infrastructure. Holders of EMTs have the right to redeem them at par value in fiat currency, thereby mirroring the functionality of conventional e-money services.
Given this functional equivalence, MiCA explicitly provides that EMTs shall be considered electronic money within the meaning of the Electronic Money Directive 2009/110/EC (EMD2). As a result, EMTs are subject to the MiCA framework as well as the provisions of EMD2, thereby ensuring that EMTs are regulated in line with existing EU rules on electronic payments and safeguarding.
(2) Licensing Requirements for EMT Issuers
Any entity intending to issue EMTs must be duly authorised as either an electronic money institution (EMI) or a credit institution by the competent authority of its home Member State. This requirement stems from the regulatory framework established under the EMD2. Compared to issuers of ARTs, EMT issuers are subject to stricter authorisation requirements, given the nature of EMTs as digital representations of fiat currency and their close interconnection with the existing payment systems.
(3) Reserve Assets and Redemption Obligations for EMTs
Issuers of EMTs are under a legal obligation to guarantee that all holders of EMTs can redeem them at any time at par value in the corresponding fiat currency. To ensure this redeemability, the issuer must hold reserve assets equivalent to the total amount of EMTs in circulation. These assets must be legally protected, kept separate from the issuer’s own funds, and held in a manner that preserves their availability and integrity for the benefit of token holders.
The reserve assets must consist of cash or other high-quality liquid assets, such as government bonds or bank deposits, which enable immediate redemption upon request. The issuer is legally bound to fulfil any redemption request without delay or refusal. In addition, to strengthen consumer protection, the issuer must include a clear and specific statement on redeemability in the EMT’s white paper. This white paper is subject to prior approval by the competent authority.
MiCA imposes minimum own funds requirements on issuers of EMTs to ensure the maintenance of financial soundness. Specifically, all EMT issuers must maintain own funds equal to at least 2% of the total amount of EMTs issued and outstanding. This capital buffer is designed to absorb unexpected financial shocks and mitigate systemic risk. For instance, if an EMT issuer has issued EMTs with a total value of EUR 500,000,000, it must hold at least EUR 10,000,000 in own funds. This requirement serves to reinforce the issuer’s financial resilience and plays a critical role in maintaining trust and credibility in the EMT market.
(5) Additional Requirements for Significant EMTs
Under MiCA, an EMT may be designated as a Significant EMT if it meets certain thresholds, thereby becoming subject to a more stringent regulatory framework than ordinary EMTs. A token shall be classified as significant if it satisfies any of the following criteria:
(i) the outstanding amount of issued EMTs exceeds EUR 5,000,000,000,
(ii) the number of users exceeds 10 million, or
(iii) the average daily transaction volume exceeds EUR 50,000,000.
Issuers of Significant EMTs are placed under the direct supervision of the European Banking Authority (EBA). They are required to implement enhanced risk management systems, submit regular risk assessment reports, and may also be subject to additional liquidity requirements, at the discretion of the relevant supervisory authorities. These enhanced requirements reflect the potentially systemic impact of Significant EMTs and aim to ensure a higher level of resilience, oversight, and consumer protection in light of their broader adoption and market impact.
(6) Restriction on Interest Payments by EMT Issuers
One of the key regulatory provisions applicable to EMT issuers under MiCA is the prohibition on interest payments. MiCA explicitly prohibits issuers from granting any form of interest to holders of EMTs. This restriction is intended to preserve the function of EMTs as pure means of payment and stores of value, and to prevent their transformation into deposit-like or investment products. If interest payments were permitted, EMTs could begin to resemble investment instruments rather than payment tools, thereby blurring the regulatory distinction between EMTs and traditional financial products such as deposits or securities. Accordingly, the interest payments ban is a preventive measure designed to ensure that EMTs remain firmly within the scope of payment regulation, rather than becoming yield-bearing vehicles.
3.3.1 Stablecoins Regulatory Approach of the Bank of England
According to the Bank of England, stablecoins are a form of inside money—money issued in the form of liabilities (credit) by private intermediaries such as commercial banks. As such, if stablecoins were to become widely used, robust regulation would be essential to ensure that the public retains confidence in money. In particular, the Bank of England sets out the view that where stablecoins are used in systemically important payment functions, it would be desirable for them to be fully backed by central bank reserves. This approach is intended to ensure a level of safety and trustworthiness equivalent to that of commercial bank money, thereby supporting monetary and financial stability.
(1) Background to Stablecoin Regulation
The Bank of England maintains an open stance toward financial innovation and supports a competitive environment. However, it emphasizes that such innovation must occur safely and in a manner that preserves financial stability and public trust, particularly safeguarding the principle of "singleness of money" The concept of singleness of money refers to the idea that all forms of money should be of equal value, freely interchangeable, and convertible into one another without loss. If stablecoins were to be widely used without securing adequate trust, concerns over delayed redemption or inability to exchange them at par (1:1) could arise. This, in turn, risks undermining monetary uniformity and weakening public confidence in the monetary and payment system, which may lead to a bank run for that stablecoin and lead to payment disruptions and a broader loss of trust in the financial system.
In response, the Bank of England stresses that systemically important stablecoins must always maintain a 1:1 exchange value with other forms of money and must be redeemable at par on demand. Accordingly, under the principle of “same risk, same regulatory outcome,” stablecoins should be held to a level of stability equivalent to that of bank deposits. However, unlike bank deposits—which benefit from deposit insurance of up to £85,000 and specialized resolution regimes—stablecoins are unlikely to be eligible for such protections. As a result, the Bank intends to apply stricter requirements on backing assets and capital adequacy than those applied to banks, in order to ensure stablecoin resilience without relying on deposit insurance mechanisms.
Stablecoins possess the potential to enhance payment efficiency and broaden access to the financial system. While traditional payment infrastructures often suffer from high transaction fees, slow settlement speeds, and reliance on specific financial intermediaries, stablecoins can enable fast, cost-effective transactions and support automated payments through the concept of programmable money, such as those facilitated by smart contracts. In terms of financial inclusion, stablecoins may offer more accessible payment and financial services to individuals who face barriers to holding conventional bank accounts. Moreover, in the event of disruptions in existing payment infrastructures, stablecoins can serve as a backup payment mechanism, thereby contributing to the resilience of the payment system.
However, stablecoins also carry a range of economic and financial risks, which, if not properly managed, could have adverse effects on financial markets and the monetary system. If a stablecoin issuer fails to maintain a 1:1 peg with the reference fiat currency, this could lead to a loss of confidence among consumers and markets, potentially resulting in a sharp devaluation of the stablecoin. Such an event could spill over into broader mistrust in the financial system and trigger large-scale outflows from bank deposits. Moreover, mass migration of bank deposits into stablecoins would increase the liquidity pressures on traditional financial institutions, potentially leading to a contraction in credit supply and upward pressure on lending rates. In particular, if stablecoins are linked to money market funds (MMFs) or other instruments in the short-term funding markets, large and sudden reallocations of capital could create significant shocks to financial market stability.
(2) Proposed Stablecoin Regulatory Framework by the Bank of England
In line with its expanded powers under the amended Financial Services and Markets Act 2023 (FSMA 2023), the Bank of England introduced the concept of a Digital Settlement Asset (DSA) as part of its regulatory framework for payment systems. A DSA refers to a digital asset designed to maintain a level of stability comparable to fiat currency, and the definition explicitly includes stablecoins, while applying regardless of whether the asset is cryptographically based or not. Importantly, unbacked cryptoassets or stablecoins that are not directly pegged to a specific fiat currency may also fall within the scope of supervision if they pose systemic risks to the financial system.
The Bank’s DSA regime primarily focuses on GBP-pegged stablecoins. The regulatory framework for stablecoins is to be developed through coordination among key financial authorities, with the Bank of England working closely with the FCA and PSR to minimize regulatory gaps and to align with international standards such as the CPMI-IOSCO Principles for Financial Market Infrastructures (PFMIs). In addition, the Bank of England will collaborate with HM Treasury (HMT) to define the broader policy direction for stablecoins and facilitate the smooth transition of existing stablecoin businesses into the new regulatory regime.
The Bank of England’s regulatory approach is focused on payment services. Where a stablecoin is used solely as a means of payment, the Bank of England will act as the lead supervisor. However, if stablecoins are used in conjunction with other financial functions—such as lending or investment product development—these activities will fall under the existing financial regulatory perimeter, such as banking or securities regulation. For example, if a stablecoin issuer uses customer funds to provide loans, this would be considered a banking activity, and the firm would be required to obtain appropriate authorisation. Conversely, where the issuer only facilitates payment services, it would be regulated directly by the Bank of England under the DSA regime.
A stablecoin payment chain consists of three core functional layers: issuance, transfer, and custody/exchange. At the issuance stage, new stablecoins are created. When a redemption request is made, the corresponding amount of stablecoins is burned, thereby maintaining the parity between the outstanding tokens and the backing assets. The transfer function involves the processing of transactions via a ledger system, which may be based on a centralised payment infrastructure or decentralised blockchain technology. Finally, the custody and exchange layer includes wallet providers and cryptoasset exchanges, which enable users to store stablecoins securely and exchange them for fiat currencies or other digital assets.
Given the involvement of multiple entities performing distinct functions, the stablecoin ecosystem naturally spans across the remits of several regulatory authorities. As inter-agency coordination is essential to ensure effective oversight, the Bank of England has stated that it will work closely with the FCA and PSR to minimise regulatory gaps and duplication, and to establish a cohesive regulatory framework. Under this approach, a stablecoin issuer would be subject to the Bank’s oversight for financial market infrastructure functions, while also being regulated by the FCA for matters relating to consumer protection and market integrity. This dual regulation model is intended to reinforce financial stability and promote clear accountability within the ecosystem. Furthermore, the Bank of is likely to require legal separation between the issuance function and other financial activities such as lending or investment services. This measure is designed to address conflicts of interest and to safeguard customer assets, particularly in light of past industry failures such as the FTX collapse.
(3) Transfer Function and Operational Requirements for Stablecoins
Key Requirements for Payment System Operators
The Bank of England has made clear that, when stablecoins are used as a means of payment, stablecoins must be supported by a level of operational resilience equivalent to that of existing Financial Market Infrastructures (FMIs). In line with this principle, the Bank of England intends to apply the Principles for Financial Market Infrastructures (PFMIs) established by CPMI-IOSCO (under the BIS) to stablecoin-based payment systems. Under the PFMIs, a payment system operator must ensure both financial and operational resilience. Once a transaction has been finalised, the system must guarantee settlement finality, meaning it cannot be reversed. Additionally, operators must have the capability to identify and control risks across the entire payment chain, including those arising from counterparties, technology, and governance.
The Bank of England, which already supervises traditional systems such as CHAPS (Clearing House Automated Payment System), will hold stablecoin payment networks to comparable regulatory standards. To comply, payment system operators must establish robust internal risk management frameworks and engage in continuous monitoring of operational risks. In particular, stablecoin systems must address vulnerabilities such as cybersecurity threats, hacking risks, technical faults, and systemic weaknesses in transaction validation. This necessitates the implementation of strict internal controls, including safeguards to ensure system availability, integrity, and data security.
Operators may adopt a public blockchain ledger (i.e., decentralised infrastructure) or develop a centralised ledger system. Regardless of the architecture chosen, the overriding regulatory expectation is that the system delivers transaction reliability and stability.
The Bank also stresses the importance of business continuity planning, requiring operators to prepare and maintain rapid recovery procedures in the event of system failures. Furthermore, to support consumer protection and transparency, operators must provide users with clear and accessible information regarding potential risks or disruptions that may arise during the use of stablecoins in payments.
Considerations for Blockchain-Based Payment Systems
Stablecoin transactions are likely to be conducted on blockchain-based networks, which differ in structure and operation from traditional centralised payment infrastructures. As such, the Bank of England recognises that distributed ledger technology (DLT)-based payment systems introduce distinct risks and challenges, and it has set out a number of keyexpectations to ensure the safety and reliability of such systems.
A key requirement is that settlement finality must be ensured, even in blockchain environments. Unlike traditional systems—where finality is achieved through a central clearing infrastructure—blockchains rely on consensus mechanisms to validate and record transactions. Because these mechanisms vary across public (permissionless) and private (permissioned) networks, the Bank expects operators to define and demonstrate technically sound procedures that ensure transactions, once confirmed, are irreversible and final. This requirement is especially important in preventing double-spending and ensuring transactional integrity.
DLT-based systems also present unique cybersecurity and governance risks, which must be managed appropriately. In permissionless blockchains, where any participant may serve as a validator, the system may be vulnerable to malicious actors or collusion attacks, such as 51% attacks or spam transactions. In contrast, permissioned blockchains restrict validation to a known set of participants, which improves control but introduces the risk of centralisation and single points of failure. If one key validator is compromised, the system's integrity may be at risk. Operators of stablecoin payment networks must therefore carefully evaluate and mitigate these risks through the design of their governance, consensus, and failover mechanisms.
For stablecoin-based payment systems to function effectively within the broader financial ecosystem, interoperability with existing payment infrastructure is essential. The ledger architecture used in a stablecoin network—whether decentralised or centralised—must be able to interface seamlessly with conventional systems. To support this goal, the Bank of England is advancing its next-generation RTGS (Real-Time Gross Settlement) system. As part of this initiative, it is developing a synchronisation interface that would enable blockchain-based payments to be settled in real time alongside traditional payments. This synchronisation capability is intended to ensure that stablecoin transactions can be reliably and securely integrated into the wider financial infrastructure, thereby promoting their safe and effective use in mainstream financial services.
(4) Reserve Asset Requirements and Restrictions on Interest Payments for Stablecoin Issuers
Reserve Asset Requirements for Issuers
To ensure the value stability of stablecoins, it is essential that all issued tokens are fully backed by high-quality reserves (100% reserves). Moreover, in order for stablecoins to achieve a level of stability equivalent to that of traditional bank deposits, the entire supply in circulation must be supported by adequate backing assets, and redeemable on a 1:1 basis at any time.
The Bank of England’s preferred model for reserve backing is one in which the entire pool of customer funds is held as central bank reserves. Under this approach, the stablecoin issuer deposits all customer funds with the Bank of England, and must be able to use those reserves to meet redemption requests immediately and in full. This structure closely mirrors the existing e-money issuance framework, and serves to prevent the issuer from exposing customer funds to external credit or liquidity risk, such as by depositing with commercial banks or engaging in risky investment activities. By adopting this full central bank reserve model, a stablecoin issuer eliminates its own credit risk, as customer redemptions are backed by the most secure and liquid form of money available—central bank reserves. This framework also ensures that users can redeem their stablecoins safely at par value at any time, which is essential for maintaining public confidence in the asset and supporting monetary and financial stability more broadly.
Restrictions on Interest Payments
The Bank of England is considering a policy under which no interest would be paid on stablecoin reserves held at the central bank. Unlike traditional bank deposits, stablecoins do not perform a lending function, and therefore, the Bank sees no monetary policy rationale for paying interest on the reserves maintained by stablecoin issuers. In addition, the Bank of England plans to prohibit stablecoin issuers from paying interest to coin holders. This restriction is intended to preserve the role of stablecoins as a means of payment, and to prevent them from being used as investment instruments. If stablecoin holders were allowed to earn interest, stablecoins would begin to function like bank deposits, potentially leading to deposit outflows from the traditional banking system, and thereby posing risks to financial stability. Should a stablecoin issuer wish to pay interest to users, it would be required to obtain a banking licence and comply with the full set of prudential and conduct regulations applicable to deposit-taking institutions. This policy direction is expected to significantly alter the business models of existing stablecoin issuers.
At present, many stablecoin firms rely on investment income from their reserve assets, such as short-term government bonds or money market funds. If these revenue streams are constrained, issuers will need to shift their focus toward enhancing the efficiency and competitiveness of their payment services—for example, by improving transaction speed, accessibility, or programmability. Ultimately, the Bank of England’s objective is to ensure that stablecoins remain a safe and trusted form of payment, while avoiding destabilising overlaps with the traditional banking sector. This approach is seen as key to preserving financial stability, maintaining monetary policy transmission, and fostering responsible innovation in the payment landscape.
(5) Additional Regulatory Requirements for Stablecoin Issuers
Legal Rights and Redemption Conditions
Stablecoin holders must have a clear and enforceable legal right to redeem their tokens at par (1:1) at any time. To uphold this principle, stablecoin issuers are required to establish a well-defined legal structure that guarantees such a claim.
The stablecoin issuance model can generally be structured under one of two legal frameworks: Under the debt model, the stablecoin holder is treated as a creditor of the issuer. In this structure, the stablecoin represents a legal liability of the issuer, and the holder has a contractual right to be repaid at face value (e.g., £1 per token) upon request. The issuer is legally obligated to honour redemption requests within a defined time frame. However, in the event of insolvency, the holder’s claim may be subject to ranking alongside other unsecured creditors, unless specific safeguards are implemented. Under the trust model, customer funds are held in a segregated trust account, and the issuer acts as a trustee responsible for managing those funds. The stablecoin holder is considered a beneficiary of the trust, with a legal claim directly against the trust assets, rather than the issuer. If the issuer becomes insolvent, the trust assets remain protected and ring-fenced from the issuer’s creditors. This structure enhances investor protection by ensuring priority access to the backing assets, regardless of the issuer’s financial condition.
Safeguarding Requirements
Stablecoin issuers are required to fully segregate customer funds from their own operational assets/funds to ensure robust protection of user deposits. To achieve this, all customer funds must be held in a segregated trust account, and must not be used by the issuer for debt repayment, operating expenses, or any other corporate purposes.
Additionally, if a third-party financial institution (such as a bank) is used to hold the reserve assets, the issuer has a duty to carefully select and continually assess the financial soundness of that institution. The issuer must perform ongoing due diligence and risk monitoring to ensure that the custody arrangements remain secure. Should the reserve institution experience distress or become insolvent, the issuer is fully responsible for promptly covering any losses incurred.
Capital Requirements
Stablecoin issuers must hold sufficient own funds to absorb operational risks and ensure business continuity. This capital requirement is distinct from the reserve assets (i.e., customer deposits backing the stablecoin) and reflects the need for the issuer to maintain a minimum level of capital necessary to operate safely and sustainably. In alignment with the PFMIs issued by the BIS, issuers are expected to maintain adequate capital to cover baseline operating expenses, and hold additional liquidity buffers to prepare for unexpected market disruptions or operational failures.
The Bank of England has indicated that stablecoin issuers will be required to implement an Internal Capital Adequacy and Risk Assessment (ICARA) process. Through ICARA, firms must identify and evaluate all material risks across their business model, including operational, legal, and technology-related risks, quantify the financial resources needed to withstand those risks and ensure they have sufficient capital and liquidity to maintain operations under both normal and stressed conditions.
Supervision & Early Intervention
The Bank of England will exercise ongoing supervisory oversight over stablecoin issuers and will hold the authority to intervene early should risks materialise or operational issues arise. If a stablecoin issuer exhibits signs of elevated risk or operational deficiencies, the Bank may issue immediate corrective measures, and where necessary, escalate to stronger regulatory actions. In situations where an issuer experiences financial distress, such as deteriorating capital adequacy or a liquidity shortfall, the Bank of England may enact emergency intervention powers. These include issuing a suspension order on redemptions, freezing reserve assets, or taking other urgent steps to prevent harm to users and to maintain system stability. If the issuer ultimately becomes insolvent, the Bank of England plans to invoke the Special Administration Regime (SAR)—a tailored resolution framework designed to ensure an orderly wind-down of the firm while safeguarding customer assets and preserving confidence in the payment system.
(6) Regulatory Requirements for Stablecoin Wallet Providers
In the stablecoin ecosystem, wallets play a critical role in enabling users to store, send, and receive tokens. Among them, hosted (custodial) wallets—which manage users’ private keys on their behalf—are of particular regulatory significance, as they effectively serve as the mechanism through which users exercise their legal claims over the stablecoins they hold. In contrast, unhosted (non-custodial) wallets, where users retain sole control of their private keys, offer a higher degree of anonymity but also raise concerns related to money laundering and financial crime. The Bank of England has indicated that, should the use of unhosted wallets grow substantially, additional regulatory measures may become necessary to mitigate associated risks.
The Bank of England is expected to apply the following principles to wallet service providers operating within systemically important stablecoin networks: First, wallet providers must ensure that technical failures within the wallet infrastructure do not disrupt the broader stablecoin payment network. This includes maintaining high service availability, robust system architecture, and disaster recovery capabilities. Second, wallets should implement mechanisms that guarantee continuity of user access and withdrawal, including in the event of wallet provider insolvency or service suspension. Third, wallet providers will be required to comply with anti-money laundering (AML) and financial crime prevention regulations. Fourth, wallet providers will be subject to ongoing supervision by regulatory authorities, including risk assessments and early intervention powers.
(7) Regulatory Requirements for Other Service Providers
In stablecoin payment systems, critical third-party service providers—such as blockchain infrastructure operators, cloud service providers, and security software vendors—play a vital role in maintaining operational continuity. However, excessive reliance on such entities can pose concentration risks, whereby the stability of the entire payment system may become dependent on the resilience of a single provider.
For instance, an outage at a major cloud provider such as AWS or Google Cloud could disrupt the entire stablecoin network. Similarly, vulnerabilities in critical security software may lead to large-scale hacks and user asset losses. To address these systemic risks, the Bank of England and the FCA are preparing to designate certain firms as Critical Third Parties (CTPs) to the UK financial sector. Once designated, CTPs will become subject to enhanced regulatory oversight and must comply with rigorous standards in the operational resilience, cybersecurity and data protection, outsourcing and supply chain risk management, and incident response and recovery planning.
3.3.2 Stablecoins Regulatory Approach of the FCA
The FCA initially envisioned a regulatory framework in which stablecoin issuance and custody would be governed under the Financial Services and Markets Act 2000 (FSMA 2000), while their use in payments would be supervised under the Payment Services Regulations (PSRs). This approach was based on the assumption that stablecoins would be used primarily in retail payment contexts. However, reflecting the evolving nature and broader potential use cases of stablecoins, the UK authorities have since signalled a shift in direction: rather than integrating stablecoin payments into the PSRs, a standalone and dedicated regulatory regime for stablecoins is now being planned.
The DP23/4 discussion paper, published by the FCA, outlines this new direction as the first phase of the UK government’s broader cryptoasset regulatory agenda. It sets out a comprehensive regulatory approach specifically for the stablecoin sector. The FCA’s overarching objective is to mitigate the unique risks posed by stablecoins and to enable their use as safe and reliable money-like instruments. By doing so, the regulator aims to safeguard consumer protection and uphold the integrity of the UK’s financial system as these digital assets become more widely integrated into economic activity.
(1) Requirements for Issuers: Asset Backing and Redemption
A regulated stablecoin—that is, a stablecoin issued by an FCA-authorised firm in the UK—must be fully backed at all times by high-quality, liquid reserve assets equivalent in value to the total outstanding supply. These reserve assets must be stable in value, highly liquid, and capable of supporting immediate redemption at par (1:1) upon user request. To meet this requirement, issuers must maintain reserve assets equal to 100% of the circulating stablecoins, ensuring that redemptions can be honoured promptly and in full. The composition of reserves is strictly limited to low-risk, high-quality, and highly liquid assets. Specifically, the UK regime is expected to permit only short-term UK government securities (with maturities of one year or less), and short-term cash deposits as eligible reserve assets. By contrast, indirect investment instruments such as money market funds (MMFs) are excluded. Furthermore, if reserve assets are placed with a third-party institution (such as a bank), the issuer must exercise a high standard of due diligence, including careful selection of the institution based on its financial strength, ongoing monitoring of the institution’s creditworthiness, and periodic reassessment to ensure that the custody arrangement remains appropriate and resilient.
From a redemption mechanism standpoint, all holders of a regulated stablecoin must have the legal right to redeem their tokens at par value (1:1) directly from the issuer at any time. This requirement addresses a key weakness in the current market, where some stablecoin issuers limit redemptions to institutional clients, forcing retail users to rely solely on secondary markets, such as exchanges, to liquidate their holdings. Under the proposed UK regulatory framework, retail users must be granted direct redemption rights, ensuring they can redeem their stablecoins at face value, without reliance on third parties. Issuers are obligated to process redemption requests promptly—typically by the next business day—and must clearly disclose any applicable fees, procedures, or conditions. They are also required to minimise any restrictions or delays in the redemption process.
In addition, the value of reserve assets must be reconciled and verified daily. If the value of the reserve falls below the total outstanding stablecoin supply—due to asset depreciation or unexpected losses—the issuer must top up the shortfall using its own funds within one business day to restore full backing. Issuers are also required to maintain transparent and accurate records relating to reserves and redemptions. In the event of the issuer's insolvency, the reserve assets— which must be legally segregated as customer assets—must be accessible for the purpose of redeeming outstanding stablecoins through a clearly defined recovery process.
(2) Regulatory Requirements Applicable to Stablecoin Issuers
In addition to meeting financial requirements, stablecoin issuers are expected to comply with general conduct-of-business obligations aimed at ensuring both consumer protection and financial stability. Under the UK regime, issuers are subject to the FCA’s Consumer Duty and the Principles for Businesses, which require firms to consider the needs, interests, and characteristics of consumers at the product design stage, and take proactive steps to prevent foreseeable harm. Even where stablecoins are initially issued to institutional investors, these obligations still apply if the tokens may be acquired by retail investors in the secondary market.
Also, issuers must ensure that contractual terms are fair, transparent, and clearly drafted. For example, if a stablecoin includes a freeze clause (allowing the issuer to block or restrict transfers), it must be narrowly and reasonably scoped, and used only for legitimate purposes such as anti- money laundering (AML) compliance, fraud prevention, or sanctions enforcement. Issuers must also comply with the Consumer Rights Act 2015 to ensure that terms are not unfair or misleading, and they must fully understand and accept their legal responsibilities to token holders.
Issuers are required to regularly disclose key information about the stablecoin via their website or other accessible channels. This includes the structure and mechanism for value stabilisation, total supply of the stablecoin, composition and total value of reserve assets, external audit reports verifying asset holdings and compliance, the rights and obligations of both the issuer and holders (terms and conditions), clear instructions on redemption procedures—including timelines, fees, and the form of returned assets, and a description of key risks that could affect price stability or redemption. All disclosures must be factually accurate, clearly presented, and free from misleading or ambiguous language. They must also meet the FCA’s standard for financial promotions/marketing, which requires that communications be “fair, clear, and not misleading”.
(3) Custody requirements
Custodians of stablecoins will be subject to enhanced safeguards modelled on the client asset protection rules set out in the FCA’s CASS Sourcebook, which governs traditional financial institutions. The foundation of this framework is the strict segregation of customer stablecoin holdings and private keys from the custodian’s own assets. Custodians must maintain accurate and separate records for customer assets,reflect this separation in the wallet architecture, and ensure that at no time are customer assets commingled with the firm’s own funds. The use of omnibus wallets—where multiple customers’ assets are held in a single address—is permissible for efficiency, but only if each customer’s beneficial ownership can be clearly identified, and ledger entries and wallet labels are kept up to date with precise mapping to individual clients. Custodians must ensure that these records are accurate, verifiable, and current at all times, so that in the event of insolvency or operational failure, the firm can promptly and correctly return each customer’s assets.
Custodians must implement robust internal controls and security protocols to protect customer assets from misuse, loss, or theft. Key expectations include multi-signature (multi-sig) authorisation to prevent unilateral access to wallets, separation of hot and cold wallets to reduce online exposure, secure and audited key management protocols, and real-time monitoring and intrusion detection systems. These technical safeguards aim to reduce both external cybersecurity threats and internal fraud or operational failures. Custodians must establish a sound governance structure to oversee client asset protection processes. This includes appointing a designated individual (e.g., a CASS Oversight Officer) with accountability for ensuring compliance with all asset safeguarding rules and conducting regular internal reviews.
(4) Organisational Requirements
Stablecoin issuers and custodians will be required to establish and maintain sound organisational structures and internal governance frameworks, in line with the FCA’s Senior Management Arrangements, Systems and Controls (SYSC) requirements that apply to traditional financial institutions. The FCA has made clear that stablecoin-related firms must adopt the same standards of governance, accountability, and risk oversight as regulated firms in the broader financial sector. This includes clearly defined governance structures, senior management with explicit responsibilities, and robust internal control and risk management systems. For example, the board of directors and executive leadership must ake direct responsibility for the proper organisation and oversight of business operations, exercise reasonable care and due diligence in managing risks, and identify, avoid, or appropriately manage conflicts of interest.
The FCA also intends to apply the Senior Managers and Certification Regime (SM&CR) in full to firms operating in the stablecoin sector. This framework is designed to ensure that individuals in key decision-making roles are fit and proper, clearly accountable, and subject to ongoing regulatory scrutiny. Under the SM&CR, individuals performing Senior Management Functions (SMFs)—such as CEOs, CFOs, COOs, and heads of compliance—will be subject to a pre-approval process by the FCA, assessing their competence, integrity, and financial soundness. Each senior manager must submit a Statement of Responsibilities (SoR) to the FCA, clearly outlining their individual areas of responsibility within the firm. Senior managers are held to high standards of conduct and compliance, and must ensure that their teams operate within regulatory expectations.
The FCA also intends to apply the SM&CR in full to firms operating in the stablecoin sector. This framework is designed to ensure that individuals in key decision-making roles are fit and proper, clearly accountable, and subject to ongoing regulatory scrutiny. Under the SM&CR, individuals performing SMFs—such as CEOs, CFOs, COOs, and heads of compliance—will be subject to a pre-approval process by the FCA, assessing their competence, integrity, and financial soundness. Each senior manager must submit a Statement of Responsibilities (SoR) to the FCA, clearly outlining their individual areas of responsibility within the firm. Senior managers are held to high standards of conduct and compliance, and must ensure that their teams operate within regulatory expectations.
Operational resilience is a key component of the organisational regulatory requirements applicable to stablecoin firms. Given the reliance on distributed ledger technology, stablecoin businesses are particularly vulnerable to technical disruptions, such as blockchain forks or cross-chain bridge hacks, which could cause widespread harm to consumers and market participants. To mitigate such risks, stablecoin firms must have the capability to identify, assess, and manage the full range of operational vulnerabilities that could disrupt important business services. This includes mapping out the critical human and technological components involved in delivering those services, conducting scenario testing to understand potential points of failure, and developing robust plans for prevention, response, and recovery in the event of an operational disruption. The FCA plans to apply its existing Operational Resilience framework (SYSC 15A) to the stablecoin sector. Under this framework, firms will be expected to identify important business services whose disruption could cause intolerable harm to consumers or the financial system, set impact tolerances—defining the maximum tolerable disruption level, develop and maintain contingency plans to remain within those tolerances, and continuously test and improve their ability to respond to incidents. Additionally, when outsourcing critical functions or relying on third- party services (such as cloud infrastructure or cybersecurity providers), firms must ensure contractual arrangements establish performance and reliability standards, and prepare contingency measures to respond to incidents that originate outside the firm’s direct control.
The question of whether the Financial Services Compensation Scheme (FSCS) should apply to stablecoin-related activities has been considered, but the FCA has indicated that it does not currently intend to extend FSCS coverage to new regulatory activities involving stablecoin issuers or custodians. The FSCS is designed to serve as a last-resort compensation mechanism, primarily for regulated deposit-taking, insurance, and investment services. Instead of relying on FSCS protection, the FCA’s approach to stablecoin regulation focuses on pre-emptive consumer protection through robust ex-ante requirements.
While the FSCS might apply in a limited, indirect scenario—for example, if stablecoin reserve assets are held in a UK bank account and the custodian bank fails, in which case customers may qualify for deposit protection up to £85,000 per individual—the FCA has made clear that stablecoins themselves will not be covered by the FSCS as a matter of course. As a result, consumer protection in the stablecoin regime will rely primarily on two pillars: Preventive regulation (e.g. safeguarding, transparency, capital and reserve adequacy), and Post-incident redress mechanisms (e.g. complaint handling and the FOS). FSCS-style compensation is expected to play only a limited, residual role, reinforcing the need for strong regulatory safeguards up front.
(6) Prudential Requirements
The FCA intends to ensure that stablecoin issuers and custodians maintain adequate financial buffers—in the form of capital and liquidity—to protect consumers from losses arising from firm failure and to support the orderly functioning of the market. To this end, the FCA plans to introduce a dedicated prudential framework through a new rulebook tentatively titled the Cryptocurrency Prudential Sourcebook (‘CRYPTOPRU’). This sourcebook will contain bespoke capital and liquidity requirements tailored specifically to the risks associated with stablecoin-related business models.
The purpose of imposing capital requirements is to ensure that stablecoin-related firms maintain sufficient financial resources to absorb unexpected losses and withstand cyclical market stress, thereby enabling the continuous and reliable provision of services. Capital buffers serve several critical objectives: loss absorption, consumer redress capacity and orderly exit.
The FCA’s capital framework is designed to prevent disorderly collapses like those seen in recent high-profile cases such as Terra/Luna and the FTX bankruptcy, where inadequate capitalisation and governance failures led to large-scale losses and systemic concerns. While weak governance can amplify risks, adequate capitalisation is a core tool for managing uncertainty and preserving trust in financial innovation. For stablecoin issuers and custodians, maintaining strong capital positions is therefore not only a matter of prudential discipline, but a fundamental requirement for protecting consumers and safeguarding market integrity.
Key components of the specific prudential requirements will include minimum capital requirements(initial and ongoing levels of own funds), liquidity requirements(sufficient liquid assets to meet short-term cash flow obligations), risk exposure limits(limits on concentration risk), and group-level risk management(intra-group risk exposures). For example, a stablecoin issuer will be required to maintain sufficient operational and contingency capital, in addition to the reserve assets held for backing the stablecoin. This means the firm must have access to dedicated financial resources to cover ongoing business operations, unexpected expenses, and crisis response needs, such as legal liabilities, cyber incidents, or redemptions under stress.
(5) Conduct of Business and Consumer Remedies
Stablecoin issuers and custodians are required to comply with the full set of FCA’s Principles for Businesses, with particular emphasis on Principle 6(A firm must pay due regard to the interests of its customers and treat them fairly), Principle 7(A firm must pay due regard to the information needs of its clients and communicate information to them in a way which is clear, fair, and not misleading), and Principle 12 (A firm must act to deliver good outcomes for retail customers). These principles establish a baseline for the fair treatment of retail users, ensuring that stablecoin firms meet the same high standards of conduct expected of traditional financial institutions. In practice, this means that marketing and promotional materials targeted at consumers must be “fair, clear, and not misleading”, as defined in FCA financial promotions rules.
Firms must provide accurate and fair disclosures regarding the features, risks, and limitations of the stablecoin product. Consumers must not be misled about the token’s stability, redemption rights, or legal protections. Additional protections are required for vulnerable consumers, such as those with limited digital literacy, financial hardship, or other risk factors. Firms must have in place effective procedures for handling complaints and resolving disputes quickly and fairly. From a financial crime and misuse prevention perspective, stablecoins—due to their relative price stability—may present a higher risk of being exploited for money laundering, terrorism financing, and regulatory arbitrage. In response, firms involved in the issuance and distribution of stablecoins will be required to comply rigorously with anti-money laundering (AML) and counter-terrorist financing (CFT) regulations. This includes robust Know Your Customer (KYC) procedures, ongoing transaction monitoring, and timely filing of Suspicious Activity Reports (SARs).Stablecoin issuers may be permitted to take mitigating actions such as freezing tokens in the event of suspected illicit activity. However, such powers must be legally grounded, transparently disclosed in terms and conditions, and exercised in a proportionate and non-discriminatory manner.
In parallel, the FCA has already introduced cryptoasset financial promotions regulations aimed at combating scams and misleading advertisements. These rules apply to all cryptoasset firms marketing to UK consumers, and stablecoin issuers will be subject to the same regime. This means that all promotional content must be fair, clear, and not misleading, avoid unsubstantiated claims about safety, returns, or stability, and include clear risk warnings. The FCA will also monitor and enforce rules against fraudulent schemes, pyramid selling, and unauthorised investment promotions, recognising that stablecoins—despite their perceived safety—can be weaponised in financial fraud without adequate controls. As part of the consumer protection framework, stablecoin firms will be required to implement effective consumer remedies mechanisms, including procedures for handling complaints and resolving disputes in accordance with the FCA’s Dispute Resolution: Complaints (DISP) sourcebook. Under these rules, stablecoin issuers and custodians must ensure that all consumer complaints are addressed fairly, promptly, and transparently. If a consumer’s complaint is not resolved within a prescribed time frame, the matter may be escalated to the Financial Ombudsman Service (FOS). The FOS is an independent body with statutory authority to investigate and resolve disputes between consumers and regulated firms. Where necessary, the FOS may issue legally binding decisions, including awarding compensation to affected consumers. As a result, stablecoin firms must establish internal complaints handling policies, designate responsible personnel to manage disputes, and respond proactively when consumer complaints arise.
From a risk management perspective, the issuer will also be required to implement an ICARA process. Through ICARA, the firm must identify and measure all material risks associated with its business model—including operational, legal, market, reputational, and redemption risks, assess the capital and liquidity needed to cover those risks under normal and stressed conditions, and maintain adequate financial resources in line with those assessments. In addition, the firm will be required to submit regular prudential reports to the relevant regulator (FCA or Bank of England), including data on capital adequacy, liquidity buffers, risk exposures, and any material changes in financial condition or business strategy.
(7) Managing Regulated Stablecoin Issuers and Custodian Firm Failures
The FCA is designing a post-failure resolution framework for stablecoin issuers and custodians, with the goal of minimising consumer harm and containing market disruption in the event of firm failure. Acknowledging that failure cannot be completely prevented, the FCA emphasizes the importance of enabling a structured, orderly wind-down or insolvency process that facilitates the safe return of customer assets and mitigates systemic risk.
If a stablecoin issuer enters wind-down or insolvency, the reserve assets held must be returned to consumers (stablecoin holders). To facilitate this, the FCA proposes introducing the concept of a “pooling event” from the existing client asset protection rules under CASS. In the event that the issuer itself holds the reserve assets and fails, a Primary Pooling Event (PPE) would occur, under which all reserve assets are pooled and either proportionally distributed to customers or liquidated and distributed in cash.
Where a third-party custodian holding the reserve assets—separately from the issuer—fails, a Secondary Pooling Event (SPE) would be triggered. In such cases, if the issuer does not make up the shortfall arising from the custodian’s failure, the resulting loss may be distributed proportionally across all customers. However, as noted above, the issuer is expected to promptly cover such third-party losses where possible. If the issuer fulfils this obligation appropriately, the stablecoin’s 1:1 value can be maintained.
To account for scenarios where the issuer fails to meet this obligation, institutional safeguards such as the FS are being considered. For example, if the reserve assets are held at a bank covered by FSCS, individual consumers may be eligible to claim compensation up to £85,000. However, due to the pseudonymous nature of stablecoins, identifying the actual beneficial owner may be challenging, which could limit the effectiveness of such compensation mechanisms.
The FCA considers it necessary to establish contingency measures for scenarios in which the core technology underlying a stablecoin—such as a blockchain network—experiences a major disruption. One proposed approach is to suspend stablecoin operations (for example, freezing on-chain transactions) in the event of a technical failure, and to treat such incidents as equivalent to an issuer failure, triggering a Primary Pooling Event (PPE) in order to protect customer assets. Further discussion is required to determine what level or type of technical failure would warrant this treatment.
Stablecoin issuers and custodians are encouraged to prepare a wind-down plan in advance, outlining how services would be discontinued in an orderly and controlled manner. Where appropriate, this may include transferring contractual obligations or operations to a financially sound third party. Under the CASS rules, the transfer of customer assets to another custodian is legally permissible, and as such, pre-designating a substitute firm to receive the issuer’s reserve assets or the custodian’s holdings is one possible solution to ensure continuity and minimise disruption.
(8) Regulating Payments Using Stablecoins
The UK initially planned to bring stablecoin-based payments within the scope of its existing electronic money and payment services framework, aiming to subject them to equivalent regulatory standards. Under the current Payment Services Regulations 2017, only the transfer of “funds” is regulated. As such, value transfers using stablecoins are not directly regulated under current law. In response, HM Treasury previously proposed amending the PSRs to explicitly include stablecoin value transfers within the definition of “funds”, thereby establishing a legal basis for consumers to use stablecoins in everyday transactions. However, the government has since withdrawn this proposal and announced its intention to develop a new, standalone regulatory framework for stablecoins. The content summarised in sections (8) and (9) of this report reflects the now-superseded direction under the proposed PSRs amendments, but is included here as background material for domestic policy discussion purposes.
Stablecoin payments offer potential benefits such as faster transaction speeds, lower settlement costs, and 24/7 availability. However, in the absence of a dedicated regulatory regime, consumer protection gaps may arise. To address these concerns, the FCA has set out three core objectives to ensure that stablecoin payments achieve the same level of safety and integrity as conventional payment systems.
Equivalence in Consumer Protection – Consumers must receive a level of protection and convenience comparable to that of existing e-money or bank payment services when using stablecoins for payments. Safe and Responsible Innovation – Service providers must develop and offer stablecoin-related services in a way that does not compromise consumer protection. Level Playing Field – All market participants should compete under the same set of rules, allowing the benefits of stablecoin technology—such as speed, accuracy, and cost-efficiency—to be delivered to consumers fairly. Meanwhile, HM Treasury has considered applying the PSRs to two distinct stablecoin payment models. In the hybrid model, the consumer pays in stablecoin, and the payment service provider (PSP) immediately converts it into fiat currency for transfer to the merchant or recipient via traditional payment rails. In the pure stablecoin model, both the payer and the recipient use stablecoins, and the value is transferred directly on-chain without any fiat conversion.
HM Treasury intends to bring both models within the regulatory perimeter, on the condition that the stablecoins used are FCA-authorised and classified as ‘regulated stablecoins’. It is also worth noting that a separate regulatory approach is being developed for overseas-issued stablecoins, and that non-commercial, peer-to-peer (P2P) stablecoin transfers are expected to remain outside the scope of regulation.
Firms intending to provide payment services using stablecoins will be required to obtain authorisation under the Payment Services Regulations (PSRs). In this context, the concept of a "Payment Arranger" is under consideration. A Payment Arranger would be subject to regulatory obligations similar to those imposed on traditional PSPs, including capital requirements, segregation of client funds, and operational standards. In addition, they would be required to comply with stablecoin-specific regulatory requirements, such as adherence to transaction processing timeframes (e.g., immediate or within a specified period), transparent disclosure of fees and exchange rates, and clear allocation of liability in the event of transaction failure or errors.
Where a merchant wishes to receive fiat currency instead of stablecoins, the Payment Arranger must be capable of facilitating real-time conversion and settlement through appropriate exchange and clearing mechanisms. Furthermore, the PSRs’ existing client funds segregation rules are expected to be extended to cover stablecoin balances. This means payment service firms will need to segregate customer stablecoin holdings and fiat funds from their own assets, mirroring the safeguards applied to crypto custodians. As a result, firms offering stablecoin-based payment services will be subject to obligations broadly aligned with those applicable to e-money issuers and conventional payment institutions, ensuring a consistent standard of operational integrity and consumer protection.
(9) Overseas Stablecoins Used for Payment in the UK
The UK is considering applying a strict approval process to foreign-issued stablecoins that are intended to be used as means of payment within the UK. HM Treasury has set out the principle that all fiat-backed stablecoins used for payments in the UK, regardless of the country of issuance, must meet equivalent regulatory standards. Under this principle of regulatory equivalence, foreign stablecoins not issued by an FCA-authorised entity would still be required to satisfy the same regulatory expectations. This ensures that consumers receive the same level of protection, irrespective of where the stablecoin is issued.
The proposed approval process for foreign stablecoins is based on the Payment Arranger model. A Payment Arranger would be a UK-authorised firm tasked with conducting the assessment and approval of foreign stablecoins for use in UK payment systems. The Payment Arranger would evaluate whether a specific foreign stablecoin and its issuer meet the same standards applicable to FCA-authorised UK issuers. If the criteria are met, the stablecoin would be classified as an “Approved Stablecoin”, permitted for use in payments within the UK. The Payment Arranger would be responsible for working with the foreign issuer to ensure compliance with the FCA’s requirements and would also be required to conduct ongoing monitoring to ensure continued adherence to the relevant regulatory standards.
However, even after approval, it must be made clear to consumers that neither the foreign issuer nor its custodian is directly regulated by the FCA. If a loss arises due to failure of the stablecoin itself (e.g. depegging), and the Payment Arranger has complied with its duties, it may not be held liable. Nonetheless, if the Payment Arranger fails to meet its review obligations and approves a non-compliant stablecoin, consumers may seek redress through mechanisms such as the UK FOS.
In summary, this regulatory model can be viewed as a “compliance gateway” for integrating foreign-issued stablecoins into the UK ecosystem. By introducing an authorised intermediary—the Payment Arranger—to validate and monitor these tokens, the UK aims to ensure that foreign stablecoins meet the same standards as domestically issued ones, thereby reducing regulatory arbitrage and mitigating cross-border consumer risk.
The UK has also acknowledged that several technical details remain under discussion, including the applicability and scope of deposit insurance (FSCS protection), contingency planning for technical disruptions such as blockchain failures, the regulatory distinction between retail payment-focused and institutional investment-focused stablecoins, and the practicality and effectiveness of the foreign stablecoin approval framework—particularly the role and responsibilities of the Payment Arranger. Despite these open questions, DP23/4 clearly signals the UK’s commitment to bringing cryptoassets—specifically stablecoins—into the regulatory perimeter, with the aim of building a safe, credible, and innovation-friendly financial environment.
Singapore intends to amend the Payment Services Act (PS Act) to establish a clear regulatory framework for stablecoins pegged to its domestic currency and G10 currencies, including requirements for credit rating restrictions of custodians for reserve assets. This section reviews Singapore’s regulatory approach to stablecoins based on the finalised regulatory framework as set out in the report published by the Monetary Authority of Singapore (MAS), which incorporates feedback received from the public consultation conducted at the end of 2022.
(1) Overall Regulatory Approach to Stablecoins
Only Single-Currency Stablecoins (SCS) issued in Singapore and pegged to the Singapore Dollar (SGD) or any of the G10 currencies (e.g. US Dollar, Euro) are subject to regulation under the SCS framework. Stablecoins pegged to other assets or issued outside of Singapore are excluded from this framework. When such non-SCS are used or circulated within Singapore, they remain subject to the existing Digital Payment Token (DPT) regulatory regime under the PS Act. MAS has explained that the SCS regulatory framework is calibrated to ensure that SCS issuers maintain high-quality liquidity through access to eligible reserve assets. Under the SCS framework, the activity of “Stablecoin Issuance Service” will be introduced as a regulated payment service under the PS Act. An entity seeking to issue SCS must obtain a licence for this service, which covers not only the issuance of stablecoins but also the custody and management of the reserve assets maintained to back the SCS.
MAS also adopts a differentiated regulatory approach for bank and non-bank issuers. A non-bank SCS issuer is not required to obtain a Major Payment Institution (MPI) licence if the total circulation of its SCS does not exceed S$5 million. Such stablecoins will not be recognised as MAS-regulated SCS. However, should the issuer anticipate or intend to exceed this threshold, it may voluntarily apply for an MPI licence in order to comply with the SCS framework. Banks may issue stablecoins in two forms. Where a bank tokenises its own liabilities (i.e. tokenised bank liabilities), such stablecoins will not be subject to additional requirements under the SCS framework, as banks are already subject to prudential requirements under the Banking Act. In contrast, where a bank issues reserve-backed stablecoins that are collateralised by assets held separately from its balance sheet, such issuance may be subject to the same requirements applicable to non-bank SCS issuers subject to MPI license. MAS has indicated that it may impose additional requirements on such bank-issued stablecoins in the future, as part of its intent to uphold regulatory parity across different types of issuers.
(2) Reserve Asset Requirements for MAS-Regulated Stablecoin Issuers
Under the new SCS regulatory framework, MAS-regulated SCS must comply with stringent reserve asset requirements. Issuers are required to maintain reserve assets with a value exceeding 100% of the par value of SCS in circulation, and these reserve assets must be denominated in the same currency as the pegged currency of the SCS. Specifically, reserve assets must consist of only cash, cash equivalents, and debt securities with a residual maturity of not more than three months. In the case of debt securities, only those issued by governments, central banks, or supranational institutions with a minimum credit rating of AA– are permitted.
Issuers must mark to market their reserve assets on a daily basis to ensure that their value is maintained at not less than 100% of the outstanding SCS in circulation. In addition, they are required to implement a robust risk management policy that addresses credit, liquidity, and concentration risks, and to demonstrate to MAS how they maintain sufficient buffers to safeguard against market volatility that may cause the reserve value to fall below the required threshold.
The custody and segregation of reserve assets are also subject to strict requirements. All reserve assets must be held in segregated accounts, such as trust accounts, and must be kept separate from the issuer’s other assets. As a general rule, the reserve assets should be placed with financial institutions in Singapore that are licensed to provide custodial services. Where overseas custodians are used, they must maintain a minimum credit rating of A–, operate a branch in Singapore, and be regulated by MAS for custodial services.
To ensure transparency, issuers must engage an independent attestor or auditor to verify, on a monthly basis, the size and composition of their reserve assets and their compliance with eligibility requirements. The attestation report must be published on the issuer’s website and submitted to MAS. Additionally, issuers are subject to an annual audit of their reserve assets, the results of which must also be submitted to MAS.
(3) Timely Redemption Requirements for MAS-Regulated Stablecoin Issuers
Holders of MAS-regulated SCS have a legal right to redeem their holdings at par value in fiat currency at any time. Issuers are obliged to fulfill valid redemption requests within five business days from the date of receipt. In exceptional circumstances—such as severe market disruption or simultaneous large-scale redemption requests—MAS retains the authority to direct issuers to liquidate their reserve assets within a specified period in order to meet redemption obligations. The five-business-day requirement applies strictly in cases where redemption is requested directly from the issuer. Where redemptions are facilitated through intermediaries, the applicable terms and conditions of the intermediary’s services shall apply.
(4) Governance and Operational Requirements for Stablecoin Issuers and Intermediaries
To ensure the sound operation of stablecoin issuers, MAS requires the establishment of internal controls and a comprehensive risk management framework. Issuers must maintain sufficient capital to demonstrate financial resilience and sustainability. In particular, they are required to hold capital adequate to cover their operating expenses and to meet prescribed minimum base capital and liquidity requirements.
Issuers must implement a Risk Management Framework (RMF) that will seout out their legal and organisational structure, key stakeholders, material risk exposures, and overall financial soundness. This framework will be reviewed on an ongoing basis under MAS’s supervision. Furthermore, issuers must strengthen their IT systems and cybersecurity protocols to minimise operational risk. For isntance, important systems relating to the issuance, redemption, and transfer of stablecoins must be safeguarded against external attacks and internal compromise through robust security controls. Accordingly, MAS requires issuers to establish a Technology Risk Management Framework (TRMF) and conduct periodic security assessments.
To enhance internal governance, all senior management and significant shareholders must be subject to a Fit and Proper assessment. Senior personnel must possess sufficient experience in finance and technology, and no disqualified persons may be involved in management. Changes in control or major shareholding interests are also subject to MAS’s prior approval.
Distributors and intermediaries are likewise required to cooperate with issuers to maintain transparency. Where stablecoins are traded on exchanges or facilitated through payment service providers, such platforms must comply with MAS regulations and enforce strict Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) obligations. Also, to clarify the legal responsibilities in the distribution process, issuers and intermediaries must enter into agreements that include customer protection measures.
(5) Transparency and Disclosure Requirements for MAS-Regulated Stablecoins
Stablecoin issuers are required to disclose key information relating to the fundamental features of the stablecoin through official channels such as the issuer’s website or a white paper. This disclosure obligation is intended to uphold confidence in the stablecoin and to protect investors and consumers. In particular, issuers must provide clear explanations of the stablecoin’s structural design, composition of reserve assets, redemption process, and associated key risks. To foster trust, issuers must also disclose specific details regarding the reserve assets, including asset types, custodial arrangements, and valuation methodology. Reserve asset disclosures must be updated at least monthly and are subject to independent attestation.
Issuers are further required to publish a contingency plan to ensure the continued stability of the stablecoin under deterioriated conditions. This includes concrete measures on how reserve assets will be deployed in response to liquidity stress or large-scale redemption requests. Such disclosures help investors and users gain confidence in the stability and reliability of the stablecoin.
MAS imposes strict requirements to ensure that information provided by stablecoin issuers is not misleading. Issuers are prohibited from representing the stablecoin as being “equivalent to legal tender” or using promotional statements that may give rise to investor misunderstanding. For example, claims such as “stablecoin guaranteed by MAS” are not permitted. Any such misrepresentation may result in enforcement actions by MAS, including the issuance of warnings or the revocation of the issuer’s licence.
(6) Market Impact and Future Outlook for MAS-Regulated Stablecoins
The stablecoin regulatory framework introduced by MAS is expected to further reinforce Singapore’s position as a global digital financial hub. Singapore is already concentrating as home to many global financial institutions and fintech firms, and issuers of stablecoins that meet MAS requirements are likely to benefit from operating in such a more favourable market environment. MAS has expressed its intent to collaborate with international regulatory authorities to contribute to the development of global standards for stablecoins, using this framework as a foundation. Accordingly, MAS-regulated SCS have strong potential to emerge as important means of payment in both the Asian and global markets, positioning Singapore as a leading jurisdiction in digital asset regulation.
The stablecoin bill recently introduced in Hong Kong* is a legislative and regulatory framework aimed at governing stablecoin-related activities conducted in Hong Kong. The bill comprises 11 Parts and accompanying Schedules, and covers the definition of stablecoins, licensing requirements, regulated activities, supervisory powers, and penalties for non-compliance. It is intended to promote financial stability and safeguard investors in Hong Kong.
According to the bill, a stablecoin refers to a cryptographically secured digital representation of value that (i) is used as a unit of account or store of value, (ii) is widely accepted by the public as a medium of exchange for goods and services, debt settlement, or investments, (iii) is capable of being transferred, stored and traded electronically, operates on distributed ledger technology or similar, and (iv) is referenced to one or more assets to maintain a stable value. Central bank digital currencies (CBDCs), securities, deposits, and stored value facilities (such as prepaid payment instruments) that are already regulated under existing financial legislation are excluded from the scope of stablecoins under the bill.
The scope of the bill covers both “specified stablecoins” and “regulated stablecoin activities.” Stablecoins that are fully backed and referenced on a one-to-one basis to a unit of fiat currency (such as USD or HKD), or other monetary value references, fall within the primary regulatory perimeter as first instance. The Hong Kong Monetary Authority (HKMA) may, by notice in the Gazette, designate additional digital representations of value as “specified stablecoins.” Algorithm-based stablecoins and tokens backed by volatile collateral are explicitly excluded from the scope of specified stablecoins. Regulated stablecoin activities include: issuing a specified stablecoin in Hong Kong; issuing a specified stablecoin referenced to the Hong Kong dollar (HKD) from overseas; and other activities as designated by the HKMA.
With respect to activities involving specified stablecoins, it is prohibited to issue or circulate a specified stablecoin without first obtaining a licence from the HKMA. A breach of this requirement may result in a maximum fine of HKD 5 million and imprisonment for up to seven years. It is also an offence to offer or sell a specified stablecoin, or to promote such offers, without a licence. Advertising regulated stablecoin activities, including via internet, social media, or offline channels, without authorisation is also prohibited. The provision of false or misleading information in the context of stablecoin transactions—such as misstatements regarding reserve backing—also constitutes an offence. Misleading promotions or unfair solicitation practices designed to induce stablecoin purchases are likewise prohibited, including any form of multi-level marketing arrangements.
To obtain a licence to issue a specified stablecoin, an applicant must submit a licence application to the HKMA, providing information including the legal form of the company, details of its senior management, business plan, and risk management policies. To be eligible, the applicant must be a company incorporated in Hong Kong or a recognised overseas corporation approved by the HKMA, and must maintain a minimum paid-up capital of HKD 25 million. In addition, the applicant must pass a fit and proper assessment of its controllers and senior management, establish effective risk management and internal control systems, maintain reserve assets equivalent to 100% of its outstanding stablecoin liabilities, and ensure that such reserves are segregated and appropriately safeguarded. The issuer must also honour user redemption rights and comply with disclosure and transparency obligations.
The framework also sets out governance and operational requirements for licensed stablecoin issuers. Any person intending to acquire a significant shareholding (defined as 10% or more) in a licensed issuer must obtain the prior consent of the HKMA, and failure to do so constitutes an offence. A licensed issuer is required to appoint both a Chief Executive (CEO) and an Alternate Chief Executive, subject to prior approval by the HKMA. The appointment or replacement of directors also requires the HKMA’s prior approval. Every licensed stablecoin issuer must also appoint a designated stablecoin manager, whose appointment is similarly subject to HKMA approval. In addition, a licensed issuer must not transfer or dispose of its business without the prior written approval of the HKMA.
The HKMA is vested with broad powers of intervention in times of financial distress. It may issue immediate remedial directions, and where necessary, require the issuer to inject additional capital, scale down operations, or strengthen internal controls. In more serious cases, the HKMA may appoint a statutory manager to take over and manage the operations of the issuer.
Stablecoins issued outside Hong Kong may also fall within the scope of regulation if they are used in Hong Kong. In particular, overseas-issued stablecoins that are referenced to the Hong Kong dollar (HKD) are subject to regulation. The HKMA has the power to designate and directly supervise foreign stablecoin issuers operating within the Hong Kong financial system.
The original purpose of stablecoins is to serve as a means of payment and settlement. However, in Korea, they are primarily traded on virtual asset exchanges in the nature of investment assets. In order to reflect these characteristics of stablecoins, regulatory approaches must address both their function as investment instruments and their use as means of payment. For stablecoins as investment assets, the core regulatory focus would be on ensuring disclosure obligations to protect users. For stablecoins as payment instruments, the most critical consideration would be the reliable maintenance of redemption resources. To assess whether any existing legislation can serve as a regulatory framework for stablecoins, the primary statute governing investment assets is the Financial Investment Services and Capital Markets Act (FSCMA). Some have suggested amending the FSCMA to include virtual assets, including stablecoins, within its scope. However, the disclosure regime under the FSCMA presumes that securities are distributed exclusively within the domestic market, and it compels domestic issuers to fulfill their disclosure obligations through public platforms operated by supervisory authorities such as the Financial Supervisory Service and the Korea Exchange. In contrast, the virtual asset market is inherently global and multi-jurisdictional, and there is no compelling reason for stablecoins to be distributed exclusively in Korea. In particular, for overseas issuers, there is no effective legal mechanism to compel them to disclose information through Korea’s domestic disclosure platforms. Furthermore, there are additional challenges, such as whether virtual assets can be subject to investment solicitation, whether differentiated application of the suitability principle based on risk levels of virtual assets is feasible, and whether it is appropriate, from a financial stability perspective, for major capital market players to engage directly in virtual asset-related business. In light of these considerations, it appears difficult at this stage to adopt the suggestion to amend FSCMA as a practical regulatory solution.
While the Electronic Financial Transactions Act (EFTA) is arguably most aligned with the intrinsic nature of stablecoins structured on a single-issuer model, the current EFTA assumes centralized management systems such as those used for electronic money or prepaid payment instruments, and thus it is not readily applicable to the decentralized characteristics of blockchain technology. Moreover, the EFTA was not designed as a comprehensive sector overarching law but as a hybrid of transaction focused provisions and regulatory provisions, and thus the EFTA has limitations to be adopted as a foundational legal framework.
Accordingly, there is no existing legal framework that adequately reflects both the payment and investment aspects of stablecoins. It is therefore desirable, from a legislative standpoint, to establish a standalone regulatory framework specifically tailored to the unique features of stablecoins. This report emphasizes the need for new legislation and proposes that such a framework would enhance market integrity, strengthen user protection, and safeguard financial stability.
The specific elements of the domestic stablecoin legislation proposed in this report are as follows:
(1) Scope of Regulation
It is first necessary to clearly define the scope of regulated activities under the proposed legislation. Stablecoins denominated in Korean won (KRW) and issued domestically would naturally fall within the scope of regulation. However, it must also be examined whether the domestic issuance of stablecoins referenced to foreign fiat currencies or other assets should be permitted. Given that one of the key characteristics of stablecoins is their potential use in cross-border payments, there is likely to be demand for issuing stablecoins in Korea that are referenced to foreign fiat currencies such as the U.S. dollar (USD) or other assets. Even for stablecoins not backed by KRW, allowing their issuance in Korea would be beneficial from a regulatory and risk mitigation standpoint, as domestic issuance facilitates the execution of redemption procedures using reserve assets in an emergency situation. For example, if the issuance of USDC, currently issued by Circle, were permitted not only overseas but also in Korea, the issuer could establish a local entity, obtain a licence from the Korean financial authorities, and issue the stablecoin under domestic regulation. In such a case, the corresponding reserve assets could be held within Korea, thereby enabling effective regulatory oversight and enforceability in the event of insolvency or other disruptions.
In the case of stablecoins issued overseas and referenced to foreign fiat currencies or other assets, domestic issuance regulations would not apply. However, in order for such stablecoins to be widely distributed or circulated within Korea, it is essential to ensure that they comply with regulatory standards equivalent to those applicable to domestically issued stablecoins. Accordingly, it may be appropriate to consider establishing regulatory requirements for the listing of such stablecoins on Korean virtual asset exchanges, or for their use as a means of payment through registered domestic electronic financial service providers or designated payment platforms. Only when these requirements are met should the overseas issued stablecoin be permitted to be listed or used in domestic payment activities.
The United Kingdom has explored a similar approach through the concept of a “payment arranger”. Under this model, a firm licensed by the FCA acts as a payment arranger and assesses whether a particular overseas stablecoin and its issuer satisfy the FCA’s standards for authorised stablecoin issuance in the UK. Only when these conditions are met would the stablecoin be classified as an “approved stablecoin” and permitted for use in domestic payment services. In such cases, since the issuer and custodian of the approved stablecoin are not based in the UK, they are not subject to the FCA’s direct regulatory supervision. It is therefore required that consumers be clearly informed of this fact—as previously discussed.
A key policy question is whether domestic regulation should be actively extended to KRW-denominated stablecoins issued overseas. With respect to regulatory approaches for stablecoins referencing a domestic fiat currency but issued outside the home jurisdiction, one possible model is the approach adopted by Singapore, which permits the domestic circulation of such stablecoins even if they do not comply with local regulatory standards—provided that adequate disclosures are made to enable users to distinguish the regulatory status of the stablecoin. Alternatively, as seen in the Hong Kong model, domestic regulation can be applied extraterritorially, requiring compliance with local regulatory standards even for stablecoins issued offshore but referencing the domestic currency.
In the case of KRW, which has limited use in international markets, KRW-denominated stablecoins are highly likely to circulate primarily within Korea. If circulation of such coins is widely permitted without compliance with Korean regulatory requirements, it may risk undermining the effectiveness of the domestic regulatory regime. Therefore, it would be more appropriate to adopt an approach similar to that of Hong Kong—namely, to apply Korean stablecoin regulations extraterritorially to KRW-referenced stablecoins issued outside Korea. That said, for KRW-based stablecoins that have been issued under the licensing regime of a foreign jurisdiction with a well-established regulatory framework for stablecoins, it may be appropriate to provide conditional exemptions to permit domestic circulation. However, to ensure effective oversight—particularly with respect to reserve asset segregation and redemption arrangements in the event of issuer insolvency—cross-border regulatory cooperation would be essential.
The recent expansion of reciprocity provisions in the GENIUS Act, which passed the U.S. Senate, to include stablecoins issued in foreign jurisdictions can also be understood in this context—as part of a broader effort to enhance international cooperation in the regulation of global stablecoin issuance and circulation.
(2) Eligibility of Issuers
As seen in the regulatory approaches to stablecoins adopted by major jurisdictions, banks are currently considered the most suitable entities to issue stablecoins. However, given that key jurisdictions such as the United States and the European Union allow both banks and non-bank entities to issue stablecoins—and considering the potential for fintech companies to provide innovative payment services using stablecoins—it would be appropriate for Korea to also permit stablecoin issuance by non-bank entities, including fintech firms.
While banks are subject to the Banking Act and other financial laws and regulations, and are therefore subject to strict prudential requirements in terms of capital adequacy, governance, and business conduct, it is expected that, for the sake of ensuring financial stability, any issuance of stablecoins should be conducted not by the bank itself, but through a separately incorporated subsidiary. Accordingly, licensing requirements for stablecoin issuers should be designed in a way that applies uniformly to both bank subsidiaries and non-bank entities.
(3) Issuer Supervision
A stablecoin issuer must satisfy prudential licensing requirements, including minimum levels of capital, liquidity, and payment capacity, as well as the fitness and propriety of major shareholders and directors, and the establishment of sound internal governance and control systems. In particular, the capital adequacy requirement should ensure that issuers maintain capital buffers in addition to reserve assets, and implement an issuance control mechanism that scales the volume of stablecoins in proportion to the issuer’s own capital base.
Issuers should also be required to publish a white paper disclosing material information, and to update it periodically. Further, they must comply with anti-money laundering and counter-terrorist financing (AML/CFT) obligations under the Act on Reporting and Using Specified Financial Transaction Information, adhere to IT security requirements that take into account the technological features of blockchain infrastructure, and establish prompt incident response procedures in the event of operational or system disruptions.
(4) Regulation of Reserve Assets
With respect to reserve assets, stablecoin issuers should be required to structure their reserves primarily in highly liquid assets—such as deposits and government securities—and to place such assets under trust with an independent third-party institution (e.g., a bank or a trust company), rather than with an affiliated entity. This is to ensure that the issuer’s default risk is not transmitted within the corporate group.
Issuers must disclose the status of reserve assets on a monthly basis and undergo an external audit at least once per year. In the event of any shortfall in the reserve assets, the issuer should be subject to an immediate replenishment obligation and must report the deficiency to the financial supervisory authority without delay.
(5) Regulatory Measures in the Event of Operational Failure
To prepare for emergency situations such as the operational failure or insolvency of a stablecoin issuer, the legal framework should provide the financial supervisory authority with powers to intervene promptly, including the appointment of a manager or administrator to take control of the issuer and manage the crisis. This would serve to minimise systemic contagion across the financial markets.
Contingency scenarios should include not only the insolvency of the issuer, but also the failure of the reserve asset custodian and critical operational or technological failures. In relation to emergency intervention, clear legal procedures should be established for the suspension of operations, appointment of a statutory manager, and other supervisory actions, so that authorities are equipped to respond swiftly and effectively in the event of a crisis.
(6) Foreign Exchange Transaction Regulation
Due to their inherent characteristics, stablecoins allow for the free cross-border movement of funds, which presents challenges in enforcing transaction reporting and regulatory oversight under the Foreign Exchange Transactions Act. In particular, peer-to-peer (P2P) transactions between unhosted wallets are not currently subject to reporting obligations or monitoring systems, and there is a legitimate risk that they may be exploited for illicit financial flows. Nonetheless, after extensive international discussion, the prevailing global consensus appears to be that wallet-to-wallet transfers should not be subject to AML/CFT regulatory obligations at this time.
The original legislative proposal under consideration by the Ministry of Economy and Finance sought to require virtual asset service providers (VASPs), such as domestic exchanges, to register under the Foreign Exchange Transactions Act and to submit quarterly reports on virtual asset transfers to overseas destinations. However, if a user transfers virtual assets from a domestic exchange to their self-hosted wallet and subsequently to a foreign exchange, the latter transfer would fall outside the scope of the domestic exchange's reporting obligations. This creates a regulatory loophole that can be easily exploited for circumvention.
Ultimately, as long as wallet-to-wallet transfers remain technically possible, it will be extremely difficult for foreign exchange authorities to comprehensively trace all stablecoin transactions. For example, if funds are transferred from a domestic exchange to Wallet A (a KYC-verified wallet), then to Wallet B (a non-KYC wallet), and finally to an overseas exchange, the domestic exchange may be able to perform ex-post identity verification for Wallet A, but any subsequent transfers to Wallet B and beyond would likely fall outside the scope of effective KYC.
Furthermore, if users make use of virtual asset mixing or anonymising services, transaction tracing becomes even more difficult. Therefore, the current foreign exchange control regime—which assumes that all cross-border transactions are routed through regulated financial institutions and are therefore reportable—is inherently incompatible for direct application to stablecoins.
Among major jurisdictions, few maintain direct and formal capital controls over foreign exchange transactions in the way Korea does, making it difficult to identify comparable legislative precedents. Recently, countries such as Japan and Brazil have made attempts to bring stablecoins within the scope of foreign exchange regulation. However, Japan has opted to impose reporting obligations only for large-value transactions, without establishing a practically enforceable implementation mechanism. Brazil, on the other hand, has adopted a highly restrictive approach—such as imposing an outright ban on transfers from virtual asset exchanges to self-hosted wallets—which is misaligned with global regulatory trends and likely incompatible with public expectations in Korea.
In light of these developments, regulating foreign exchange transactions involving stablecoins should be considered a separate policy issue requiring further examination from a broader, macroprudential perspective.
The domestic stablecoin regulatory framework proposed in this report is intended to proactively manage the various risks associated with stablecoins, thereby safeguarding the stability of the Korean financial system while supporting the sound development of an innovative financial ecosystem. By establishing a stablecoin regulatory regime tailored to the domestic context and promoting international regulatory cooperation that encompasses foreign-issued stablecoins, Korea will be able to achieve consistency and level with global regulatory approaches while enhancing the international competitiveness of its virtual asset market.
OVERTAKE
